Is Cryptocurrency the Future? Rise And Fall Of Cryptocurrency

Topic – Is Cryptocurrency the Future? | 2022-23

In the past few years, at some point, you might have come across the word cryptocurrency unless you live in a forest with no internet. You might have heard, “invest in cryptocurrencies” “ cryptocurrency is the future” and you start to wonder what is so-called cryptocurrencies? What exactly is it and how does it work? What is the future of cryptocurrency? and What is wrong with our current FIAT currencies? To know about cryptocurrencies and their future you first need to know how our current FIAT currency system works and how it may collapse in the future?

What’s wrong with our current FIAT currency ?

Barter system

A barter system is an act of trading goods without the use of money. For example a few eggs for a loaf of bread or a dozen of chickens for a cow. This system failed largely because mutual needs weren’t always met, there was no common measure of value. As a result, a common medium of exchange was introduced like gold, silver, and copper coins were used for trading. Eventually, that failed too.

Asset backed system

Then came the asset-based exchange. A medium of exchange like currency (paper notes) was introduced that was backed by gold or silver. You give your gold to the bank, and they give you currency for trade or vice versa. An ounce of gold is equal to a sum of money.

But this comes with a constraint, that you can only print money when the asset gold is available. You may well know that digging gold is difficult and it is not easily available. So in times of demand, there was less money in circulation, which paved the way for unemployment and other calamities that came with it.

FIAT Currency

To overcome this, governments have left the gold standard and begun to use the FIAT currency system. You could say this in layman’s terms as the FIAT system means the government can print as much money as they want. So you might wonder, why there is still poverty, unemployment and why can’t they just give money to people?

Assume any country. At the end of the year, the government generates a sum of money through taxes and other variables. Let’s say that all numbers add up to 5 trillion. But their expenses are a little over 7 trillion. So they borrow money from other countries to pay off the expenses. They generate bonds with other nations that the loan is to be paid with interest in a period. Unfortunately, they couldn’t generate more money, so they take off new loans with other countries to pay off the old ones. This goes on and on until there was no one to buy from.

Risk of recession and inflation

A solution would be to cut spending, which is almost impossible, or to raise taxes. This is called recession and the government simply can’t afford to do it since they will have riots on their hands. Another solution will be to just simply print more money to pay off the debt. But when there is something available in large numbers, its value is much less than it was before. This is called inflation. You see those fuel prices rising, well not exactly it’s your money’s worth getting lower rather than the other way around.

In around 2007, Zimbabwe faced hyperinflation due to the mismanagement of money by the government that ended up printing trillion dollar bills to solve the hyperinflation. Yet it was in vain, the currency was declared worthless and they switched to other country currencies like US dollars.

FIAT currencies always have a risk of inflation. The history speaks for itself, where Germany tried to pay off their allies after world war 1 by printing more money. It ended up losing its worth. People burned paper money to keep them warm and some used it as wallpaper for their houses. The same happened to Hungary, in the 1940s and the more recent one in zimbabwe in 2007.

The pandemic has left many countries in more debt than you can imagine. Soon, there won’t be anyone left to borrow money from which results in not paying off the debts. This breaks the chain system where institutions, banks, investors who took off loans could not afford to pay back causing an economic collapse.

Also, the idea of our money being held by a centralized institution like the government isn’t welcomed by some people because the government can manipulate money however they want.

The beginning of cryptocurrencies

It all started with a paper published after the global economic collapse in 2008 titled “ Bitcoin: A peer-to-peer electronic cash system “ under the pseudonym Satoshi Nakamoto which is a 9-page article talks about a new currency called bitcoin that is completely digital. This article paved the way for the future of cryptocurrency. Some say it was influenced by the movement back in the 90s called the cypherpunk movement. A movement that believed in cryptography for the privacy of individuals.

The cypherpunks simply didn’t like the idea of centralized money that banks, governments have all the information about us and can manipulate money whenever and however they want. This article by satoshi Nakamoto uses mathematics, computer science, and cryptography to explain how a digital currency can work.

Cryptocurrencies are digital currencies with no physical form and are not backed by any government or institutions. It is a decentralized system where all the information is stored in different nodes or computers all over the world.  So that raises the question: How does one get bitcoin?

Bitcoin mining

To bring new bitcoins into circulation, you need to mine them. Not like drilling a hole, use heavy machinery type mining rather than a complex one that involves computers and mathematics. Satoshi Nakamoto gives us an ultimatum that to bring more bitcoins into circulation, you need to solve a complex numerical problem. To solve this numerical problem, you need powerful computers, a power supply, and mining software.

Let’s keep this aside for a moment and talk about how transactions work. All the transactions are stored in ledgers or blocks.  A block can hold up to 2759 transactions. You can see all the transactions made till now but you don’t know who made the transaction to who since it is encrypted by cryptography.

To generate a single block it takes about 10 mins. Bitcoin miners use their resources to solve the numerical problem resulting in a new block for a reward of a few bitcoins. You are given a public key and a private key to make the transactions.

You can’t manipulate a transaction since it has to be verified by all the computers around the world. There is less possibility of hacking with the usage of blocks. You may think that these transactions will take longer, but are super fast with minimal to no cost. Above all, unlike FIAT money cryptocurrencies have steady inflation.

Till now there are more than 12000 cryptocurrencies all over the world. Not all follow the bitcoin procedure, different cryptocurrencies have different approaches. Some of the other cryptocurrencies are Dogecoin, Ethereum, Bitcoin, XRP, Tether, USD coin, and many more.

You might wonder, what kind of numerical problems would these be? To know about this, you first need to know what hash and hash target is.

Hash and Target hash

A hash will take any input and generate a random output in a specific length. The same input will always give the same output. Hypothetically, if the input is XXXX, the output will be h68gj30s6d7r8t4j5lk689dy3ed75yr8 on all computers.

Even if I were to change the input to, XXXY, the output will change drastically change like this, gj67f8et5yt8cm1z4xv3n80mbnv7xb3na.

Every block has a header, more like a name (which helps us in finding that individual block). The block name will go through the process of hashing, then generate the output. The hashed block name (random numbers and letters) will have a numeric value that can be calculated by using advanced calculators on the computers.

A hash target (Numerical value) will be set for every block. If the generated hash is less than or equal to the target value, a new block will be added. Otherwise, the calculation process is repeated. The bitcoin network can manipulate the target hash value by making it more difficult just so that the average mining time of one block can take up to 10 minutes.

Bitcoin miners use their resources to solve this numerical problem to generate a new block in reward for a few bitcoins. This is how the new bitcoins are introduced into circulation.

Transactions

All the transactions made are stored in these blocks or some may call ledgers. A block can hold up to 2759 transactions. You can see all the transactions made till now but you don’t know who made the transaction to who since it is encrypted by cryptography.

Every individual on the network will be given an encrypted public and a private key to make the transactions.

Nobody can forge a transaction since it has to be verified by all the computers or nodes around the world. There is less possibility of hacking with the usage of blocks. You may think that these transactions will take longer, but are super fast with minimal to no cost. Above all, unlike FIAT money cryptocurrencies have steady inflation.

Till now there are more than 12000 cryptocurrencies all over the world. Not all follow the bitcoin procedure, different cryptocurrencies have different approaches. Some of the other cryptocurrencies are Dogecoin, Ethereum, Bitcoin, XRP, Tether, USD coin, and many more.

A Brief Timeline of Cryptocurrencies

2008 – After the economic collapse, a domain name of bitcoin.org was formed shortly followed by the famous paper titled “ Bitcoin – A peer to peer electronic cash system “ under the pseudonym Satoshi Nakamoto ( still anonymous ).

2009 – People begin to notice the potential of cryptocurrencies and started mining for a few bitcoins.  Transactions were made securely using their computers. During this period, satoshi Nakamoto sends 10 bitcoins to a programmer.

2010 – The famous bitcoin transaction happened in 2010 when Someone ordered a couple of pizzas for 10000 bitcoins. This went viral over the internet and more people turned their heads towards the cryptocurrency.

2011 – The popularity of bitcoin paved the way for the new cryptocurrencies. Competitions started to rise when Litecoin, Namecoin were introduced. These were called altcoins and they provided some additional features like fast transactions, more privacy.

2012 – Companies like Microsoft, WordPress started to accept bitcoin as their payment. But things started to heat up when Mt.Gox one of the largest exchange platforms, announced that people can exchange bitcoin for FIAT currencies on their platform.

2013 – Bitcoin saw its first peak in its value when the price of one bitcoin was estimated at 1000$.

2014 – Mt.Gox was shut down following a major theft announcing that they can’t account for 850000 bitcoins. The following years were the worst days for bitcoin. The prices dropped by 100$ during these times. Yet, the demand and hype were still there.

2016 – Ethereum network and blockchain technologies were introduced. It had the potential to revolutionize the entire online world with its privacy, anonymity, fast and secured technology.

The rise in value of cryptocurrencies

2017 – Japan announced bitcoin as their legal payment. Soon, the bitcoin prices started to rise. A single bitcoin was worth more than 20000$. Bitcoin saw its first real peak during this time.

2018 – The cryptocurrency crash. Some countries like china banned cryptocurrency usage in their countries which caused fear among people ultimately resulting in a crash. The price of one bitcoin was dropped to 3000$.

2019 – A tweet from Elon musk saying that Tesla will now accept bitcoin created spark again. In the pandemic times, governments started to print more money to manage the expenses, which caused the people to notice the inflation. Institutions like Venmo, PayPal, Amazon, Walmart started to accept cryptocurrencies.

2021 – Bitcoin price hovered around 60000$ during 2021 and it still is which brings us the question of what is the future of cryptocurrency after 2021? But before we get to that, we need to know the problems and possible scams that come with the usage of cryptocurrencies.

Problems and Scams in Cryptocurrencies

Some people think cryptocurrencies are a scam, it’s just hype, you might wonder if they are crazy to believe that the future of cryptocurrency is at risk. But believe me, they have every right to do so.

The Energy Problem

Mining bitcoins uses heavy computers which require a huge power supply due to its workload. The climate activists quickly began to notice this and raised questions involving the increasing usage of coal, fossil fuels that cause environmental pollution.

A recent paper revealed that Bitcoin miners use more electricity than Argentina in a year. These accusations almost put the future of cryptocurrency at risk.

Bitcoin miners defended this by saying that they use renewable energies like solar, wind, hydropower on their own for mining. Some studies were conducted on the legitimacy of these statements. The outcomes were inconclusive since it contained different results ranging from 30 % to 70% usage of renewable energy.

The illegal stuff sales

The anonymity and privacy that cryptocurrencies provide come at a price. It led to the sales of drugs and other illegal stuff in the dark market.

Silk Road, one of the popular dark web sites for drugs, stolen credit cards, and other illegal activities used bitcoin for transactions. It was shut down by the US government in 2013 and it is said that the US government seized almost 1 billion worth of bitcoins.

A study shows that 46 % of illegal activities happen with bitcoin as their medium of exchange. Another study shows the increase in online drug sales from 19.9 % to 27.1 % in 2019 with the rise in popularity of cryptocurrencies.

Even though the reputation of bitcoin was tarnished due to Silkroad, it showed how bitcoin can be used in the real world.

The cryptocurrency scams

The Elon Musk imposter scam

Some imposters pretending to be Elon musk on Twitter posted a tweet saying that there is a giveaway of bitcoins. If somebody sends their bitcoins to the attached wallet, they would eventually get double the amount of bitcoins they put in.

Since the bitcoin wallet site looked legit, and more so the fake Twitter account was similar to Elon Musk’s account, bitcoin holders fell into this trap and gave away all of their bitcoins to the scammers. Some people even lost their retirement savings and it is reported that the scammers stole about 2 million worth of money in bitcoins.

The Tether scam

Tether is a cryptocurrency that has a one-to-one ratio with the US dollar, simply put 1 tether coin = 1 dollar. For every tether coin generated, it should be backed by the asset. Although tether is not used for day-to-day payments, it is often considered as a medium of exchange for cryptocurrencies.

For example, if I invested in bitcoins and I notice the market is going down I simply take my invested money and hold it as a tether coin until the market rise. Since tether is backed by the US dollar, I can retain my money value and I can get back into investing whenever the market is good.

But what if, there isn’t money involved to generate a tether coin. You don’t put in money but you generate coins. This was found out and skeptics have filed a complaint against the company for printing coins that are not backed by the US dollar. A lawyer of tether admitted that only 72 % of tether coins in circulations are backed by the assets like US Dollar, gold, Bitcoin, etc.,

A study by a professor and his student named “ is Bitcoin Un-tethered “ reveals that tether is a scam just to manipulate the bitcoin market price. To this day, tether company has not released its financial reports.

Afriscript scam

Two brothers from Southafrica currency exchange services where eventually ran away with almost 3 billion worth of bitcoins from their investors.

Fake website scams, save the children scams, squid coin scam, NFT fake art scam, Fake cryptocurrency scam, and the list goes on and on.

These types of scams and problems put the future of cryptocurrency in jeopardy.

Future of Cryptocurrency

With all being said, what is the future of cryptocurrency ?. Well, it is hard to predict the future of cryptocurrency, because it’s still in its early stages. Nowadays, it is mostly seen as a store of value or an asset for investing.

But the utmost goal is to be used as a regular currency like FIAT. It has the potential to replace FIAT currencies cause many countries are on the verge of inflation as I explained before. But usage of high energy for mining, hacks, scams, puts cryptocurrency’s future in question.

The future of cryptocurrencies may be uncertain, but blockchain technology has a bright future. Many Countries, Governments, Banks, Institutions are looking to adapt to blockchain systems to be more secure and private. Japan, Singapore, the United Kingdom, Venezuela, Chile, Estonia, already started to implement blockchain technology in various sectors from energy to finance.